Real Dividend Growth Rate
The rate of growth of a company’s dividends adjusted for inflation, reflecting the real increase in dividend value over time.
Understanding Real Dividend Growth Rate
When we talk about the Real Dividend Growth Rate, we’re looking at the increase in a company’s dividend payments after adjusting for inflation.
This ensures that the growth rate reflects actual increases in the purchasing power of the dividends you receive, rather than nominal increases that may not keep up with the cost of living. Focusing on real growth gives us a clearer picture of an investment’s performance over time.
It’s crucial to distinguish Real Dividend Growth Rate from nominal growth. While nominal growth simply tracks the percentage increase in dividends year over year, it doesn’t take into account the eroding effects of inflation on the value of the payments.
We use historical inflation rates to adjust and accurately calculate the real growth rate.
Here’s a quick breakdown using a table:
Year | Nominal Dividend | Inflation Rate | Real Dividend Growth Rate |
---|---|---|---|
1 | $1.00 | 2% | – |
2 | $1.03 | 2% | 1% |
3 | $1.06 | 2% | 1% |
As seen in the table, even if nominal dividends appear to grow, the real growth might be smaller once we account for inflation. Understanding this helps us make more informed investment decisions.
We ensure our portfolios are built to achieve growth in real terms, protecting our investments against inflation and maintaining our purchasing power.